Supplier-Induced Demand: Some Empirical Evidence and Implications
The professional relationship arises from the significant information differential between physician and patient, and permits the physician to exert direct, non-price influence on the demand for his own services. If the economic status of the physician affects the level and direction of such influence exerted, then models of the demand for care which do not include explicit consideration of supplier behavior are incompletely specified.
This paper outlines the effect on demand analyses of two alternative specifications of physician behavior, and notes that each can lead to ‘perverse’ response of price to increases in supply, or of quantity demanded to price. It then examines several pieces of empirical evidence from Canada and the United States which are consistent with substantial demand influence by physicians, with responses of generated output to physician stock around 80 per cent through increases in supply of physician-initiated services. The conclusion is that policy to limit price inflation, correct ‘shortages’ or restrain unnecessary utilization cannot be based on conventional supply and demand models.
KeywordsInsurance Coverage Income Assure Expense Stein
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- 3.For example, G. Monsma, ‘Marginal Revenue and the Demand for Physicians’ Services’, in H. Klarman (ed.), Empirical Studies in Health Economics (Baltimore: John Hopkins Press, 1970) surveys data on the response of physician practice patterns to rates of payment. U. Reinhardt, ‘An Analysis of Physicians’ Practices’, unpublished doctoral dissertation (Yale Univ., 1970) calculates rates of payment per minute for several types of common activities and notes how these bias activities. The Task Force Reports on Costs of Health Services in Canada (Ottawa: The Queen’s Printer, 1970) note instances of specific responses to fee schedule revisions—sharp increases in activities whose relative price had risen—as well as general ‘over-doctoring’ in areas with relatively large physician stocks as procedures were multiplied to maintain incomes. The list could go on indefinitely.Google Scholar
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